Investment Climate July 2018: The Nonsensical Capital Gains Tax


Investors in Taylor Frigon Capital Management’s growth investment strategies enjoyed the best quarterly performance they have had in the last few years.  All portfolios ended the quarter with YTD performance that was well in excess of the general market, and the performance was broad-based, across a number of industries and sectors.  In our last quarterly commentary, we outlined a major change that is brewing in computer architecture for which we are positioning our portfolios. Some of those themes have already started to produce. And even some of our “older theme” positions have taken off, as well. It is particularly notable that we believe we are seeing the beginning and by no means the end of certain trends.  Thus, there is no one aspect of our portfolio management process to which we can attribute the performance.

We also noted last quarter that we transitioned out of a number of very long-term holdings that resulted in significant realized gains.  This transition has evolved over the last couple of years and we are pleased that we are much closer to completing that process than beginning it.  Needless to say, this results in the realization of long term capital gains and, therefore, the payment of capital gains taxes.  We will do everything we can to mitigate the impact of capital gains in our strategies, and considering we generally hold positions in our portfolio for many years exemplifies that approach, in contrast to management styles with higher turnover.  However, there comes a time when we have to realize our gains and reposition our capital in places we think can provide better returns in the future.

This necessity provides an excellent opportunity to reflect on tax policy and its impact on business and investment.

Anybody who is facing the hard, cold facts of paying taxes on capital gains understands how annoying, and even painful they can be.  In high-tax states like California and New York it is simply excruciating!  This allows those payers to understand that taxation affects behavior.  It often affects actions so much that people will make very bad investment decisions just to avoid taxation.  One example happens when investors blindly look to realize losses in companies that may be very solid long-term investments just so they can offset capital gains.  In other words, incentives matter, and tax incentives can lead to self-damaging decisions.

We struggle with the fact that tax law is inept, demonstrated by the fact that long term investors in real estate are given a favorable way to avoid capital gains taxes (1031 tax free exchanges, or “Starker Exchanges”) for “exchanging” (another word for “trading”) from one “like-kind” property to another, if done using a proper intermediary.  However, if one were to “exchange” (or trade) shares of Home Depot common stock for the shares of Lowes common stock (a like-kind exchange if there ever was one!) and did so by selling the Home Depot shares at a higher price than they had originally paid for them, he or she would have to pay a capital gains tax on the profit.  This creates a disincentive to making the trade, and a disincentive to investing in stocks altogether.  It favors investment in real estate over investment in the equity of a corporation.  It also incentivizes the real estate investor to over-pay for property just to avoid the tax (under 1031 exchange rules, the investor must identify a new property within 180 days) thereby driving the prices of properties higher than they would have been if the playing field were level.

None of this activity is grounded in sound economics.  It ultimately results in distortions and misallocation of capital, all of which hurts the economy, and ultimately costs us all in the form of lost jobs and even failed business.  With all the talk about taxes in the last year (and we would add that we believe there were some very positive aspects of the new tax law), we would’ve hoped the “un-economic” aspects of taxation would be addressed.  But they were not.  In many cases, taxes just got more complex, or at least were not made any simpler.

When we address this topic, we are often asked about a solution.  We have long stressed the solution is in true simplicity and a broadening of the tax base.  Here, we would argue for the lowest, flattest tax rate applied across all forms of income such that the incentives are all equally aligned to foster economic activity, favoring no one group or industry, and giving everyone a stake in the system.

Does that sound simple enough?

It is.

Do we think it will happen?

No.

Why?

Because politicians make the rules.

Meanwhile, we will continue seeking out companies that make it possible to, as Dick Taylor would say, “get by in spite, ”  and preferably “THRIVE” in spite!
_______________________________________________________________________________
Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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Have you heard of this company? Carvana (CVNA)

























image: Carvana website (link).

From time to time, we highlight specific companies which we believe fit the profile of a classic Taylor Frigon growth company. These are companies which meet specific criteria which indicate that they are well-run businesses operating in fertile fields for future growth, as discussed in previous posts  (such as this one) describing our investment philosophy.

Fertile fields for future growth often involve a paradigm shift in a business or industry -- and while companies involved in the technology industry may be the first that come to mind for many investors looking for paradigm shifts, transformative paradigm shifts are taking place in other industries all the time. Sometimes these shifts involve the application of new technologies to industries that might seem to have little to do with traditional "tech names" at all. Investors looking for growing businesses should be alert for such opportunities.

One industry that might seem to be far removed from the transformative power of technology is the used-car business. Over a trillion dollars a year are spent in the US alone for the purchase of used automobiles, but it is an enormously fragmented market, with many of those transactions taking place between private individuals or at small used-car dealerships, and some of them at new-car dealerships. The market is so fragmented that the largest used-car seller in the country, CarMax, makes up less than 2% market share.* An even more revealing statistic pointing to the extreme fragmentation of the market is that the top 100 players account for less than 10% total market share.

Into this trillion-plus-dollar marketplace, Carvana brings an entirely different approach, with the goal of transforming the car-buying experience using technology and a scalable logistics operation which enables them to cut costs, lower prices, and (perhaps most importantly) eliminate some of the biggest pain points in the used-car buying experience for their customers.* 

Carvana's approach is to use technology to eliminate the physical dealership and the used-car salesman altogether, enabling the buyer to shop for and purchase the vehicles entirely online, similar to any of the other e-commerce business models which have transformed retail. However, because an automobile purchase is so much larger than the typical e-commerce purchase, the auto-sales industry is not easily disrupted by the same forces that have so radically transformed (and continue to transform) other areas of retail. Among other reasons, auto purchases are very high-dollar (typically the second-most expensive purchase for any household), the sheer range of products is overwhelming (in terms of make, model, body style, year, mileage, special features, etc., about which different potential customers will have very different feelings, often strong feelings), the purchasing process itself is complex (and often involves the trade-in of another vehicle), and an automobile is obviously too large to send through the mail or leave on your doorstep in a cardboard box.

In order to create a buying experience which enables the purchase of something as complex, personal, and challenging as an automobile, Carvana has built a well-planned logistics infrastructure to enable them to acquire, stage, and deliver used cars to buyers all over the country. From the buyer's perspective, the process is extremely simple -- they can go online to Carvana's website, choose from an inventory of nearly 10,000 used cars and trucks, select the one they want, obtain financing if necessary, and buy the vehicle without ever setting foot in a dealership. The buyer schedules delivery, and Carvana then delivers the vehicle to the buyer's home or business, on a single-car carrier, as soon as the following day (depending upon the location of the vehicle they selected). Carvana also picks up the trade-in vehicle (if any), and takes it away to sell at wholesale auction (Carvana is not re-selling trade-in vehicles).

The purchased car comes with a warranty, and the buyer can return the vehicle to Carvana within seven days if they change their mind or find something about the car they didn't like.

The entire process is designed to be superior to other methods of buying a used-car by offering better selection (nearly 10,000 vehicles, with greater variety than can be found in a single local market or at a single physical dealership), better value (due to the elimination of traditional dealership costs, including the cost of real estate and the cost of paying a salesforce), and a better experience (making the purchase of a car as easy as other e-commerce purchases, and eliminating the pressure and haggling that is typically associated with buying a used car, whether from a dealership or from a private individual).

The entire online purchasing process takes about twenty minutes -- and some customers go through the process in as few as ten minutes. Additionally, by eliminating the costs associated with the traditional model, Carvana can save the buyer an average of about $1,400 versus the conventional used-car model. 

Carvana's logistical network consists of staging lots which do not have to be located in prime retail locations (they can be located "out in the woods" somewhere, in order to save on real estate costs, since customers do not come to these lots), as well as a fleet of multi-car carriers to move inventory between different staging areas around the country, and a fleet of single-car carriers to deliver vehicles within each selling region (each local market in which Carvana presently operates needing only two such single-car carriers, to take the purchased vehicles from the staging lot to the customer's home). 

Because Carvana owns their own trucks, and knows how long it takes to get a vehicle from one part of the country to another on its trucks, it can confidently tell a buyer when that buyer's vehicle will be delivered to them, and control the process to ensure that the car is delivered on time.

Carvana acquires (or "sources") their inventory at auctions, using their own proprietary algorithms based on what characteristics and features they believe will be the most marketable, and what they learn from the data they accumulate from their own business records. Unlike other buyers at auction, Carvana saves money by not sending human reps to these auctions, but instead relies on their algorithm, and then sends the acquired vehicles to centers where they will be inspected and reconditioned before being put up for sale. 

At the heart of this logistics system are these inspection and reconditioning centers, or IRCs -- a concept pioneered by CarMax and adopted by Carvana as well. At the IRCs, the vehicles acquired at auction are prepared for sale, and they are photographed from all angles, inside and out, so that they can be displayed online. Any flaws or dings are noted and listed, so that potential customers have a level of confidence and transparency that rivals what they could see in person at a dealership. 

Carvana's logistical network constitutes a barrier to entry for competitors trying to duplicate their system -- particularly the large-scale inspection and reconditioning centers that create the capacity to power a national used-car brand. It is important to recognize that the used-car market has previously been a local market. By creating the logistical backbone necessary to sell cars online nationwide, Carvana has created a scalable business -- one in which the number of potential buyers for their entire 10,000-car inventory grows with each new local region that they enter. 

Because they do not have to purchase or rent expensive real estate or pay expensive salespeople the way a traditional dealership would, it is relatively inexpensive for Carvana to open up operations in a new region -- they just need a staging lot to receive vehicles, and two single-car carriers with local customer-service personnel to deliver vehicles to their customers.

Instead of having a vehicle delivered to their door, the Carvana customer can also opt to pick up their purchased vehicle at one of Carvana's signature "vending machines," which they have built in selected markets. These machines are fully-automated (see this video) and are stocked with vehicles that have already been purchased by customers who choose to pick them up there instead of having them delivered. The image at the top of this post shows Carvana's newest such machine, a nine-story platform in Phoenix, Arizona -- their largest yet, capable of holding up to thirty-four vehicles at a time.

If you want to buy a vehicle from Carvana but live in an area where they do not yet have local deliveries, you can fly to a city with a vending machine to pick up your car and drive it home -- and Carvana will pay $200 towards the cost of your airline ticket (as well as pick you up at the airport to take you to your car, where it will be waiting inside the machine).

The vending machines are largely a marketing tool -- but they are a cost-effective form of marketing, usually built in a high-visibility location, visible from major freeways, and they help build awareness among the car-buying public of the Carvana brand.

Of course, any company involved in the auto industry will be subject to changes in market sentiment surrounding the perceived outlook for auto sales. However, investors should realize that when prices go down, Carvana is able to acquire vehicles for lower cost as well (and the opposite holds true in an up market). As we have written in other previous posts about our investment philosophy, we believe in owning a business through the market cycles, if it is a well-run business which is positioned in front of fields for future growth.

We believe that customers are becoming more comfortable with making even major purchases online, and that Carvana has created a well-conceived model to enable the online purchase of used cars -- a model which could transform the way many people buy cars. For this reason, we believe it is the type of company that investors should be looking for, and that it fits the definition of a Taylor Frigon growth company -- which is why we own it for our investors, as part of a portfolio of other companies from many different industries and sectors, in our Core Growth Strategy.


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* At the time of publication, the principals of Taylor Frigon Capital Management owned shares of CarMax (KMX) and Carvana (CVNA).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.



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What Would Happen If We Were All Passive Investors?



Gerry Frigon, CIO of Taylor Frigon Capital Management, wrote this article which was recently featured in Forbes, "What Would Happen If We Were All Passive Investors?".  It discusses how "...the perception that ETFs are safe, liquid, inexpensive and easy for the average investor to own is a dangerous trend that could have unforeseen consequences for the market and economy." READ MORE
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Have you heard of this company? Cryoport (CYRX)






































Cryoport is a logistics company specializing in solutions for the life sciences industry. The company provides a complete range of solutions for the unique needs of the nascent regenerative medicine field, including CAR-T therapy (discussed below). Cryoport currently has a market capitalization of $225 million and is headquartered in Irvine, California.

Cryoport's customers include biotech and pharmaceutical companies, medical research laboratories, universities, as well as fertility clinics involved in reproductive medicine, and veterinary companies involved in animal health. 

Of the company's revenues over the last four reported quarters, 76% came from biotech and pharma customers, 14% from customers involved in human reproductive medicine, and the remaining 10% from customers involved in the animal health industry. The company saw revenue growth in each segment over the past year, at a rate of 11% growth in revenues from the reproductive medicine segment, 34% growth in revenues from the animal health segment, and 72% growth year-over-year in revenues from biotech and pharma segment.

The astonishing growth in the biotech and pharma segment can be attributed primarily to the advent of a new paradigm in regenerative medicine, requiring patient samples and especially manufactured treatments to be shipped at temperatures below -136 degrees Celsius, much colder than the temperatures achieved with dry ice. Dry ice has a temperature of -79 degrees C, which is cold enough for the safe shipment of some types of treatments, but not for the new CAR-T and related treatments described below, which have only just begun to be approved for use with patients outside of clinical trials (the first two such treatments were approved by the FDA for patients in the US as recently as fall of 2017).

This relatively new field of regenerative medicine uses the body's own defense mechanisms, specifically the T-cells of the patient's own immune system, to fight diseases (especially cancer) which would otherwise be able to hide from the immune system. The video below gives a broad overview of the concept:

"Immunotherapy" is the term for treatments which use the patient's own immune system to fight a disease such as cancer, typically by adding information to the immune system to enable it to fight the problem that it otherwise would not be able to detect. Among the first types of immunotherapy to make it through clinical trials have been therapies using a technique known as CAR-T, which stands for "chimeric antigen receptor" in the T-cell, because these therapies use T-cells which have been altered to express a protein which otherwise would not be present, which is referred to as a chimeric antigen receptor.

In order to help the T-cells in the immune system of a patient fighting a specific type of cancer, CAR-T therapies take the T-cells from the individual patient to be treated, and then use a retrovirus to write new code to the T-cells causing them to express new antigen receptors which can defeat the "masking" capabilities described in the video above. The patient's own T-cells, modified with the chimeric antigen receptor protein, are then shipped back to the patient and introduced to the patient's own immune system, in the hope that they will enable the patient's own immune system to defeat the disease.

So far, some of the results for achieving complete remission from certain types of cancer have been extremely promising, with one CAR-T therapy for a type of leukemia which primarily affects children yielding complete remission in just over 80% of cases, versus chemotherapy alone, which achieved complete remission in less than 10% of cases. In another type of cancer afflicting primarily adults, complete remission was seen in nearly 40% of cases, versus only 8% for chemotherapy alone (some light chemotherapy is typically used on the patient prior to the re-introduction of the modified T-cells). Also, unlike other types of treatments, CAR-T therapy is typically a one-time treatment.

Logistically, these new types of regenerative medicine require the treatment (consisting of the  patient's own modified T-cells) to be kept in cryogenic suspense between the manufacturing facility (the lab where they are altered using a retrovirus to express the chimeric antigen receptor) and the hospital or other facility where they will be reintroduced to the patient. Additionally, if the sample does not stay below -136 degrees C the entire time, there is no easy way of knowing that just by looking at the sample -- it does not change color or appearance, and it does not change smell. Thus, keeping it at cryogenic temperatures, and knowing for certain that it has been kept at cryogenic temperatures the entire time, is extremely important.

It goes without saying that the logistics side of these treatments is extremely critical. Someone's life is depending on the treatment, and the effectiveness of that treatment is dependent upon keeping it cold enough the entire time until it is given to the patient. Additionally, the treatment itself tends to be very expensive, as it is a new type of therapy, it is manufactured specifically for each patient individually (using that patient's own T-cells), and it takes about eighteen days to manufacture each patient's individual treatment.

In other words, there is a lot riding on the integrity of the logistics solution in these treatments.

Cryoport's unique value proposition is a logistics solution which not only provides the containers which can keep a sample at temperatures below -150 degrees C, but which is also equipped with numerous sensors to track and record the temperature throughout the shipment, as well as to monitor other important readings which can help catch and correct problems before they lead to a "temperature excursion" which would compromise the treatment.

Cryoport designs their own cryogenic dry vapor dewars which are charged with liquid nitrogen and capable of keeping temperatures of the contents below -150 degrees C for up to ten days. Their dewars and related shipping containers (some of which are shown in the photograph at top) have certain patented features which distinguish them from others available in the logistics world.

However, the real differentiator of the Cryoport logistics solution is the ability to monitor the shipment throughout its entire journey on Cryoport software which enables both Cryoport and the customer to see where the product is at any given time, as well as to see the container's internal and external temperatures, the dewar's angle of tilt (if the dewar stays tilted too much for too long, its cryogenic temperatures will be compromised), the barometric pressure, the humidity and moisture levels present, the time and location of any "shock events" such as from accidentally dropping the container, and (using a light sensor) how many times the container is opened (which must sometimes take place if going through customs, for example).

Cryoport's software incorporates custom algorithms to help them manage the shipment very closely, and sends alerts if a shipment appears to be hung up in customs, or if conditions indicate the potential for a temperature excursion. Cryoport can then send personnel to remedy the problem, correcting the tilt, or recharging with liquid nitrogen, before cryogenic temperatures are ever compromised.

Cryoport's solution has been selected by all of the biotech and pharma companies who are active in developing immunotherapy or regenerative medicine treatments, including Novartis, MesoBlast, Atara Bio, bluebird bio, Bristol-Myers Squibb, Juno Therapeutics (now part of Celgene), and Kite (now part of Gilead). These and other companies currently have over 200 therapies in clinical trials which are using Cryoport for their logistics (214 in total).

The first two CAR-T therapies to make it through clinical trials were approved in the second half of last year: Kymriah from Novartis and Yescarta from Kite (now Gilead). Logistical requirements typically grow steadily as a therapy moves from Phase I to Phase II to Phase III of clinical trials. However, once a treatment is approved for commercial use, logistical requirements can increase significantly, as patients will then be located in many more locations, and their T-cells will have to be shipped to the pharmaceutical company's manufacturing facilities (laboratories) and the personalized treatments sent from there back to the patient's location.

In addition to the first two treatments to make it to FDA approval, there are now 26 therapies in Phase III clinical trials whose companies use Cryoport for their logistical solutions. If only 50% of these therapies make it to final FDA approval (which is an approximate estimation for therapies in Phase III trials, although there is no way to predict for certain, especially since this area of medicine is very new and there have been some treatments which have had severe problems during clinical trials and had to be discontinued) then that would suggest that Cryoport could have 12 to 13 additional therapies to service in the relatively near future.

The area of regenerative medicine is still in its infancy, and there are issues (particularly the cost of treatment) which will have to be addressed in the future. However, as noted above, there are some very promising indications that immunotherapy can become a new tool in helping the body's own immune system to fight disease, producing success rates well beyond the current treatments.

We believe that Cryoport has a logistics solution which addresses the unique needs of this exciting new field of medicine, one which is trusted by the major players in the industry, and one which is eminently scalable and can grow to meet the needs of patients and providers as the industry grows. Further, we believe there may be advantages to investing in Cryoport rather than trying to predict the clinical success of any one specific experimental treatment or any one specific biotech or pharmaceutical company participating in the regenerative medicine market.


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At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Cryoport (CYRX). At the time of publication, the principals of Taylor Frigon Capital Management did not own shares of any of the other companies mentioned (including FedEx, UPS, Novartis, or Gilead).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
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What Will The "Wizards of Wall Street" Think Up Next?



















image credit: ZeroHedge.

Well, that was fun!

The largest point drop in the Dow Jones Industrial Average (DJIA) in history on Monday February 5, 2018.  Of course, the financial news media had a ball reporting on this historic day, regardless of the fact that when prices go higher, the impact of a higher price movement is, of course, relative (the percentage drop was not even close to historic).  Nonetheless, even we, who have been watching market moves for decades now, were somewhat taken back by the violent swing in the DJIA when at one point we observed about a 1000 point swing in a matter of mere seconds!

We have come to virtually ignore such actions despite the awe they inspire in the moments when they are happening.  Frankly, such events have become great "educational moments" for those of us who adhere to a discipline of considering the investments we make in publicly traded companies as investments in businesses.  Yes, we mean investments!  Does anybody remember that word?  Webster's defines it as follows: the outlay of money usually for income or profit : capital outlay; also : the sum invested or the property purchased.

We suggest that this is somewhat limiting because it does not give any reference to time.  We have always viewed investment in a business as something that requires time, some length of time, maybe years, to fully reap "income or profit" with any level of certainty.  At least Webster references "property" in the definition as this can in some way be connected to time.  Does anyone invest in property for a few seconds, even days, weeks, months, quarters?  Surely, years?  Of course it is possible to invest in property, and in this instance we mean "real property", or what is commonly known as "real estate" for any amount of time, even seconds, we suppose.  But in reality, most "investors," when investing in property, think of it as "long-term," measured in years, usually, as the time frame for which they will be invested.

How does this discussion of property ownership relate to Monday's wild stock volatility?

Well, referencing back to the action of the market on Monday past, it occurs to us that investing in businesses should be considered similarly to the way people invest in property.  But this is not the case in the stock market today.  And this lack of patience is exacerbated by the financial engineering that has been propagated by the illustrious "Wizards of Wall Street," who dream up complex "financial products" which have little to nothing to do with the allocation of capital to actual businesses.

In this recent article in the Wall Street Journal, "Born To Die: Inside XIV, The Busted Volatility ETN" author Charles Forelle describes the Credit Suisse creation called "VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note".  Huh?

This derivative instrument is a way for traders to "invest" in the lack of volatility in the market.  This does not sound like anything remotely resembling investing in businesses -- more like speculation or even gambling.  Especially when you follow the path of progression for this instrument that ultimately ensured that it would race to "zero" value in the future. Forelle notes that the instrument's prospectus even noted that it would ultimately result in zero value. However, along the way, it appears to have created a level of volatility in the shares for real businesses which happen to be traded on the public markets, and can therefore be connected to the reason we witnessed such wild swings in the market on February 5, 2018.

This is just the latest culprit.  There have been plenty of others over the years.  We recall the infamous "portfolio insurance" products of the 1980s that aided in the over 20% drop in the market averages on October 19, 1987.  Forelle references that disastrous day in his article as well.

When and where does this stop?  Perhaps nowhere and never.  As long as the focus is short-term in nature, and purports to give people better mouse-traps for making money (particularly the financial industry), then this stuff will continue.  We can only plead with those that care about their asset value over time that they avoid getting caught up in such schemes.  That they recognize there is no magic to making good returns investing but disciplined, hard and tenacious due diligence in choosing companies in which to invest.  And that the best way to invest is to stick as close to "real" investing as one can.  We have preached about this, and we have delivered this as professionals over the decades.  But we are often lone voices in the morass of the financial world in making this case.

Hopefully, days like Monday February 5, 2018 and follow up articles like the one Charles Forelle has written, will teach the world a lesson!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
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